On the mend

Healthcare mutual funds experience long recovery; biotech funds shine

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It was like an extended hospital stay for several healthcare mutual funds since last year, as most sectors-from pharmaceuticals to health maintenance organizations-continue to suffer from chronic under-performance.

One big exception: biotechnology stocks, and funds that invest in companies like Amgen (Nasdaq: AMGN). In fact, pure biotechnology sector portfolios were at the top of the heap of healthcare funds in the first quarter while others with a high concentration in biotech picks also posted good returns.

Healthcare stock funds had an average total return of 45.65% for the year through March 31, 2000, according to Chicago-based mutual fund research firm Morningstar. And biotech-heavy funds continue to outpace other healthcare portfolios.

Excitement over potential blockbuster drugs and the completion of the Human Genome Project, a complete mapping of the human genetic structure, by 2003, is driving investor interest in the sector, says Emily Hall, analyst with Morningstar.

For managers who run biotech funds in particular, finding companies with strong product pipelines and earnings growth is crucial to their performance.

Kurt von Emster, portfolio manager of the $1.4 billion Franklin Biotechnology Discovery Fund (Nasdaq: FBDIX) is looking for companies with new drugs that are likely to be approved by the Food & Drug Administration in the next two to five years, which combat major diseases like cancer and cardiovascular illnesses. His approach helped Franklin Biotechnology Discovery garner a return of 41.40% in the first quarter, according to Morningstar.

He’s invested 4% of the fund’s assets in Abgenix (Nasdaq: ABGX), making it the top holding. The company has a patented technology to genetically engineer mice with human genes called Xeno Mouse. The mice are exposed to certain diseases, and the antibodies they produce to fight those diseases are then developed into drugs. Its most promising product is a psoriasis treatment that’s in Phase II clinical trials. Some of his other major holdings include Amgen (Nasdaq: AMGN) and Inhale Therapeutic Systems (Nasdaq NM: INHL).

Faraz Naqvi, portfolio manager for the $450 million Dresdner RCM Biotechnology fund (Nasdaq: DRBNX), says an important key to outperforming his peers is estimating which parts of the biotech universe are attractive, and when.

“It’s just guessing when market swings will occur,” says Naqvi, himself a physician. “In 1999, first it was large caps [that were in favor], then genomics, then small caps. And right now, the bulk of our portfolio is in small caps and genomics,” since large-cap biotech stocks have already enjoyed a decent run-up. Genomics biotech firms use sophisticated gene therapies to develop drugs.

Among Dresdner’s top holdings as of late February: Millennium Pharmaceuticals (Nasdaq: MLNM), Human Genome Sciences (Nasdaq: HGSI) and Protein Design Labs (Nasdaq: PDLI). And while his fund is strictly a pure play on biotech, he does invest in related companies like e-commerce health research firms Chemdex (Nasdaq: VNTR) and Sciquest.com (Nasdaq: SQST). Dresdner RCM Biotechnology had a total return of 36.41% in the first quarter.

But before you start loading up on biotech or healthcare funds in search of juicy 100%-plus returns, break out the antacid. Sector funds in general are extremely

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